9th February 2015
The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT.
Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.
The scheme is optional and open to businesses that do not breach the relevant limits which have recently changed due to the increase in the standard rate of VAT. From 4 January 2011, a business must leave the scheme when income in the last twelve months exceeds £230,000, unless this is due to a one off transaction and income will fall below £191,500 in the following year. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.
The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.
To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time.
You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement.
The flat rate scheme cannot be used if you:
In addition the scheme cannot be used if, within the previous 12 months, you have:
The scheme will clearly be inappropriate if you regularly receive VAT repayments.
VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.
The percentage rates are determined according to the trade sector of your business and range from 4% to 14.5%. The table in the appendix to this factsheet summarises the percentages. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration. The percentages used in the scheme changed from 4 January 2011 to reflect the increase to 20% in the standard rate of VAT.
If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.
Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.
Cook & Co is a partnership operating a café and renting out a flat. If its results for 2012 are as follows:
VAT inclusive turnover: £
Standard rated catering supplies 70,000
Zero rated takeaway foods 5,500
Exempt flat rentals 3,500
£79,000
Flat rate 12.5% x £79,000 = £9,875
Normally £70,000 x 20/120 = £11,667 less input tax
The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way. Where the input VAT is reclaimed you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.
Items under the capital goods scheme are excluded from the flat rate scheme.
Transactions within the European Community
Income from sales of goods is included in your turnover figure.
Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.
The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.
Under the scheme you must keep a record of your flat rate calculation showing:
You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.
The scheme is designed to reduce administration although it will only be attractive if it does not result in additional VAT liabilities. The only way to establish whether your business will benefit is to carry out a calculation and comparison of the normal rules and the flat rate rules.
We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme. Please do not hesitate to contact us.
Trade Sector Appropriate % from 1 January 2011
“Labour-only building or construction services” means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are “general building or construction services”.
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